What Is Tezos? On-Chain Governance and Proof-of-Stake Guide

Tezos implements on-chain governance for seamless protocol upgrades without hard forks, while liquid proof-of-stake lets any XTZ holder earn staking rewards.

Introduction

Tezos is a self-amending blockchain platform that upgrades its protocol without hard forks through on-chain governance. The network launched on 30 June 2018 after an initial coin offering in July 2017 that raised $232 million. Tezos uses liquid proof-of-stake consensus, where XTZ token holders validate transactions through baking or delegate their tokens to active validators while keeping full custody. The platform uses formal verification in its smart contract language Michelson, which creates mathematical proofs of code correctness before deployment.

The blockchain processes governance through a four-stage voting cycle that spans 12 to 15 weeks per amendment. Bakers and delegators participate equally in protocol decisions, with each XTZ token representing one vote whether self-staked or delegated. Since mainnet activation, the network has completed over 17 protocol upgrades including Nairobi in June 2023 and Oxford in November 2023. The platform hosts applications spanning NFT platforms, decentralized finance protocols, asset tokenization, and enterprise implementations across gaming, real estate, and government sectors.

Tezos competes with Ethereum and other smart contract platforms through technical differentiation in governance models and formal verification. The network consumed approximately 0.001 terawatt-hours of energy annually as of 2021. Understanding Tezos requires examining its governance mechanisms, consensus operations, smart contract architecture, real-world implementations, and comparative positioning within the blockchain ecosystem.

What is Tezos?

Tezos is a proof-of-stake blockchain platform launched on 30 June 2018. The network raised $232 million during its initial coin offering in July 2017, which became one of the largest ICO fundraises at that time. Arthur and Kathleen Breitman founded the project, with Arthur authoring the original technical whitepaper under the pseudonym L.M. Goodman in September 2014. The Tezos Foundation, incorporated in Switzerland in 2017, coordinates protocol development and ecosystem support.

The platform implements liquid proof-of-stake consensus, where validators called bakers create blocks and confirm transactions. Token holders with at least 6,000 XTZ can become bakers, while those with smaller amounts delegate their tokens to existing bakers without transferring custody. The native cryptocurrency XTZ serves as the network's unit of account for transaction fees, staking deposits, and governance participation. Tezos processes approximately 40 transactions per second on its base layer, with each block confirmed in roughly 30 seconds.

What makes Tezos different from other blockchains?

Self-amendment and on-chain governance

Tezos implements a formal on-chain governance system where XTZ holders vote directly on protocol amendments. The self-amendment mechanism writes upgrade procedures into the blockchain itself, so the network can modify its own rules without requiring hard forks. Each XTZ token grants one vote in governance decisions, distributed proportionally to the amount staked or delegated. Bakers and delegators hold equal voting power based on their respective stakes.

The protocol divides governance authority across token holders rather than concentrating power in a foundation or core development team. Proposals originate from any participant who submits code and documentation to the network. The voting process evaluates technical implementations rather than abstract suggestions, requiring proposers to deliver working code for consideration. This structure creates accountability because the community votes on specific changes they can review and test.

Successful amendments activate automatically across all nodes without manual intervention from validators. The protocol replaces its own codebase during activation, eliminating the coordination costs and potential conflicts that occur during hard forks. Ethereum and Bitcoin rely on off-chain coordination through improvement proposal processes, where core developers and mining pools negotiate changes outside the protocol. Contentious hard forks on these networks have produced permanent chain splits such as Bitcoin Cash in 2017 and Ethereum Classic in 2016.

How does Tezos's formal amendment process work?

Tezos processes protocol amendments through four consecutive stages: exploration, promotion, cooldown, and adoption. Each stage lasts five blockchain cycles, with one cycle consisting of 24,576 blocks that take approximately 2.8 days to produce. The complete amendment process requires approximately 12 to 15 weeks from initial proposal to activation.

Exploration period

The exploration period accepts protocol amendment proposals from any network participant. Bakers vote to select one proposal for detailed evaluation, or they vote to maintain the current protocol unchanged. A proposal requires a simple majority of votes to advance to the next stage. The protocol calculates voting power based on the total baking power each baker controls, which includes both self-staked XTZ and delegated tokens. Multiple competing proposals can enter the exploration vote simultaneously. Bakers evaluate each proposal's technical implementation, potential impact on network performance, and alignment with ecosystem priorities. The voting period allows bakers to test proposals on separate test networks before casting final votes. If no proposal achieves majority support, the protocol returns to the exploration period with a new set of potential amendments.

Promotion vote

The promotion vote evaluates whether the selected proposal should proceed toward activation. This stage requires an 80% supermajority approval rather than a simple majority. The higher threshold ensures broad consensus exists before committing resources to final implementation.

Bakers examine the proposal's code quality, security implications, and compatibility with existing smart contracts during promotion. The test network runs the proposed changes in parallel with mainnet, providing real-world performance data for evaluation. Developers publish documentation explaining the technical modifications and their expected effects on network operations. The promotion stage acts as a quality filter, preventing insufficiently vetted proposals from reaching deployment.

Cooldown period

The cooldown period provides a mandatory waiting interval after promotion approval before activation occurs. This stage lasts five cycles but contains no voting activity. The cooldown gives the community time to prepare infrastructure, update documentation, and conduct final security reviews.

Bakers and developers use this period to verify the proposal's implementation matches its specification. Third-party auditors can review the code for security vulnerabilities or unintended behaviors. The delay prevents rushed deployments and reduces the risk of critical bugs entering production. If major issues emerge during cooldown, the community can coordinate to reject the proposal in the adoption stage.

Adoption phase

The adoption phase conducts a final approval vote using the same 80% supermajority threshold as the promotion stage. Bakers vote to either activate the amendment or reject it based on cooldown period findings. Successful adoption triggers automatic activation at the end of the adoption period.

The protocol updates itself by replacing the current rule set with the new implementation. All nodes transition simultaneously without requiring manual software updates from individual validators. The amendment takes effect at a predetermined block height, ensuring synchronized activation across the network. Failed adoption votes return the protocol to exploration stage, where new proposals can enter consideration.

What are some major protocol upgrades Tezos has implemented?

Tezos completed 17 protocol upgrades between its June 2018 mainnet launch and November 2023. Each upgrade addressed specific technical limitations, added new features, or optimized existing operations.

The Babylon upgrade activated on 10 October 2019, introducing a new consensus algorithm that improved finality time and simplified the amendment voting process. Babylon also added new Michelson instructions for smart contract development and optimized gas consumption for common operations. The upgrade modified the block reward structure to better align baker incentives with network security.

Carthage activated on 5 March 2020, implementing the second iteration of the consensus improvements begun in Babylon. This upgrade increased the gas limit per block by 30%, raising the network's maximum throughput from approximately 30 to 40 transactions per second. Carthage also reduced the activation threshold for future proposals from a supermajority to 80% quorum.

Granada activated on 3 August 2021, introducing liquidity baking, a protocol-level mechanism that automatically directs a portion of block rewards to a decentralized exchange liquidity pool. The upgrade reduced block times from 60 seconds to 30 seconds, doubling the network's transaction confirmation speed. Granada also implemented more efficient signature verification algorithms that reduced gas costs for smart contract operations. Ithaca activated on 1 April 2022, replacing Emmy+ consensus with Tenderbake, a new algorithm based on Tendermint that reduced block finality to two confirmations. Previous consensus versions required approximately 30 to 60 confirmations for practical finality, while Tenderbake provided finality in roughly one minute. The upgrade introduced randomness generation improvements that strengthened the baker selection process against predictability attacks.

Nairobi activated on 24 June 2023, implementing ticket hardening that improved smart contract composability and security. The upgrade reduced the time required to validate blocks and added new tools for developers building decentralized applications. Nairobi also optimized storage costs for frequently accessed contract data.

Oxford activated on 11 November 2023, introducing Smart Rollups technology that creates Layer 2 scaling solutions secured by the Tezos mainnet. Smart Rollups process transactions off-chain while posting cryptographic proofs to Layer 1, increasing throughput without compromising security. The upgrade also improved validator rewards distribution and added new cryptographic primitives for privacy-preserving applications.

What is the environmental impact of Tezos?

Tezos consumed approximately 0.001 terawatt-hours of electricity annually as of 2021, equivalent to the energy used by 17 global citizens. The network produced an estimated 0.001 million tonnes of carbon dioxide emissions per year during the same period. These figures place Tezos among the most energy-efficient blockchain platforms operating at scale.

The platform's energy consumption per transaction measured approximately 30 milligrams of CO2 equivalent. This amount equals the carbon emissions generated by roughly 30 seconds of video streaming. A single Tezos transaction used 0.00006 kilowatt-hours of electricity, comparable to powering an LED light bulb for approximately 35 seconds.

Proof-of-stake consensus requires validators to lock tokens as economic security rather than solving computational puzzles. Bakers run standard server hardware instead of specialized mining equipment designed for hash computation. The consensus mechanism selects block validators based on their staked token weight rather than computational work performed. This design eliminates the arms race for processing power that drives energy consumption in proof-of-work systems.

Ethereum's pre-Merge proof-of-work consensus consumed between 46 and 94 terawatt-hours annually before its September 2022 transition to proof-of-stake. Bitcoin's proof-of-work network consumed approximately 131 terawatt-hours per year as of 2022. Tezos used roughly 2 million times less energy than Ethereum's pre-Merge operations and maintained this efficiency since its 2018 launch.

What are the four stages of the Tezos governance voting process?

The governance voting process operates through four sequential stages that each last five blockchain cycles. One cycle consists of 24,576 blocks that take approximately 2.8 days to complete. The entire process from proposal submission to activation spans roughly 12 to 15 weeks. The exploration period opens when any participant submits a protocol amendment proposal to the network. Bakers review all submitted proposals and vote to select one for advancement or vote to maintain the current protocol. A proposal needs a simple majority of votes weighted by baking power to proceed to the promotion stage. Bakers control votes proportional to their total baking power, which includes both self-staked tokens and tokens delegated to them.

The promotion stage conducts a supermajority vote requiring 80% approval for the selected proposal to advance. Bakers evaluate the proposal's technical implementation and test it on separate test networks during this period. The higher threshold ensures broad consensus exists before committing to deployment. A proposal that fails to achieve 80% approval returns the protocol to the exploration stage.

The cooldown period provides a mandatory five-cycle waiting interval with no voting activity. This stage gives the community time to conduct final security reviews, update infrastructure, and prepare for potential activation. The delay prevents rushed implementations and creates space for identifying critical issues before deployment.

The adoption stage conducts a final 80% supermajority vote to either activate or reject the amendment. Successful adoption triggers automatic activation at the end of this period, where the protocol replaces its own codebase with the new implementation. All validators transition simultaneously without requiring manual software updates. Failed adoption votes return the protocol to the exploration stage for new proposals.

How does baking and delegation work on Tezos?

Baking functions as Tezos's equivalent to staking or block validation in other proof-of-stake networks. Individuals who wish to become bakers must stake a minimum of 6,000 XTZ and maintain the technical infrastructure necessary to validate transactions and create new blocks. The hardware requirements for baking include a dedicated machine with at least 3 CPU cores, 8GB of RAM, 100GB of SSD storage, and a reliable internet connection operating continuously. Bakers receive rewards for successfully proposing blocks and participating in consensus voting, with the protocol issuing a maximum of 5 XTZ per block for block proposers and 5 XTZ for consensus voters. The network selects bakers randomly based on their total baking power, which includes both self-staked tokens and delegated tokens from other participants.

Token holders with insufficient XTZ to meet the 6,000 minimum or those lacking technical expertise can delegate their tokens to active bakers. Delegation differs fundamentally from transferring tokens because delegators retain full custody and ownership of their XTZ while granting the baker permission to use those tokens as baking power. Delegated tokens remain liquid and never leave the delegator's wallet, so participants can undelegate or move funds at any time without penalties. Bakers distribute rewards proportionally to their delegators after deducting a service fee that ranges from 5% to 15%. The delegation process requires no minimum amount, making it accessible to holders with any quantity of XTZ.

The reward distribution timeline involves multiple blockchain cycles due to security requirements built into the protocol. New delegators must wait approximately 2 cycles before their delegated stake contributes to the baker's baking power. When a baker earns rewards, the protocol freezes those rewards for 5 additional cycles, or approximately 14 days, to ensure the baker fulfills consensus obligations during the period when baking rights were assigned. After the freeze period expires, bakers can distribute rewards to delegators, resulting in a total waiting period of roughly 35 to 37 days between initial delegation and first reward payment. As of February 2026, bakers earn approximately 14.9% annual yield through solo baking, while delegators receive 3% to 6% after baker fees. The network's inflation rate of approximately 5.5% annually funds these staking rewards.

How do smart contracts function on the Tezos blockchain?

Tezos smart contracts are written in Michelson, a low-level stack-based programming language designed specifically for the blockchain. Michelson operates by manipulating data directly on a stack through rewriting operations, where each instruction consumes elements from the top of the stack and pushes results back onto it. This stack-based architecture differs fundamentally from traditional programming languages that use variables and memory allocation. Michelson is Turing-complete, meaning it can express any computational problem that a universal Turing machine can solve. The language was deliberately designed to support formal verification, a mathematical methodology used in aerospace and nuclear industries to prove that code executes exactly as specified. Formal verification represents Michelson's primary advantage over languages like Solidity, which powers Ethereum smart contracts. Michelson's deterministic execution model and explicit type system let developers construct mathematical proofs that demonstrate contract correctness before deployment. Tools such as Mi-Cho-Coq, Helmholtz, and WhylSon use proof assistants like Coq and Why3 to verify Michelson contracts automatically. Solidity uses a high-level syntax similar to JavaScript, making it more accessible but harder to verify comprehensively due to implicit behaviors and complex execution environments. The immutability of deployed smart contracts magnifies the importance of pre-deployment verification, as vulnerabilities cannot be patched after activation.

Developers can write Tezos contracts in higher-level languages that compile to Michelson, reducing the complexity barrier. SmartPy provides Python-like syntax, LIGO offers JavaScript/TypeScript and OCaml variants, and Archetype was developed specifically for Tezos with security-focused features. All three languages compile down to Michelson bytecode, inheriting its formal verification capabilities while improving developer experience. Smart contract execution on Tezos requires gas fees paid in XTZ, calculated based on computational effort and storage allocation. The fee formula combines a base fee, gas cost proportional to execution complexity, and storage cost for data persistence. Gas limits prevent infinite loops and ensure network stability, with excess gas refunded after successful execution.

What are the main use cases for Tezos in real-world applications?

Tezos established a significant presence in the NFT market through partnerships with major sports and entertainment brands prioritizing energy efficiency. Manchester United entered a multi-year sponsorship deal with Tezos in February 2022 valued at £20 million annually, designating the blockchain as its official training kit partner. The partnership includes NFT fan experiences built on the Tezos blockchain and ongoing donations in XTZ to support the Manchester United Foundation. McLaren Racing and Red Bull Racing became official partners of Tezos in 2021, launching NFT collections for their Formula One, IndyCar, and esports teams. Ubisoft launched Ubisoft Quartz in December 2021, introducing Digits as the first playable NFTs in a AAA video game through Ghost Recon Breakpoint on the Tezos blockchain. The gaming integration represented notable industry adoption due to Tezos's energy-efficient proof-of-stake consensus, which requires electricity equivalent to thirty seconds of video streaming per NFT mint.

Asset tokenization demonstrates Tezos's capability to digitize real-world property and financial instruments. MountX Real Estate Capital and Vertalo completed Mexico's first real estate tokenization in November 2020, digitizing two apartments in Querétaro valued at $250,000 USD on the Tezos blockchain. The tokenization used triple-entry bookkeeping, API connections to broker-dealers, and secondary liquidity through alternative trading systems. MountX planned to expand this initiative to over 15 real estate projects across Mexico and Canada by 2021.

Government adoption marked a pioneering use case when France's Gendarmerie nationale began using Tezos for operational purposes in September 2019. The cybercrime division C3N implemented a private smart contract to validate and record judicial expenses incurred during investigations. This solution addressed operational delays where investigators waited months for expense approval, sometimes requiring colonel or general authorization for amounts as small as €300. The implementation represents one of the first documented instances of a government entity using blockchain smart contracts for active operational functions. The Tezos gaming ecosystem experienced substantial growth in 2025, surpassing 130,000 monthly active users in December and recording 4.3 million on-chain transactions through flagship gaming titles. Tezos also supports decentralized finance applications through various DEX platforms and DeFi protocols built on its smart contract infrastructure.

What are the benefits and risks of using Tezos?

Tezos offers several structural advantages rooted in its self-amending architecture and energy-efficient consensus mechanism. The protocol's on-chain governance eliminates the need for contentious hard forks and upgrades the network while maintaining unity. Tezos has executed over 17 protocol upgrades since its 2018 mainnet launch without splitting the community or requiring manual node software updates. The liquid proof-of-stake mechanism consumes approximately 0.001 terawatt-hours annually, positioning Tezos among the most energy-efficient blockchain platforms. Formal verification capabilities in Michelson smart contracts create mathematical proofs of correctness, reducing vulnerability to exploits that have cost other blockchains billions in losses. The low barrier to staking participation through delegation lets any XTZ holder earn rewards without minimum requirements or specialized hardware.

Tezos faces adoption challenges stemming from its smaller ecosystem compared to established competitors like Ethereum. The developer community remains comparatively limited, with Michelson's low-level stack-based syntax creating steeper learning curves than Solidity or other high-level languages. Network effects favor Ethereum's extensive tooling, documentation, and established developer base, making it difficult for alternatives to attract projects despite technical advantages. Tezos operates with continuous token inflation at approximately 5.5% annually to fund staking rewards, which dilutes non-staking holders and differs from fixed-supply models like Bitcoin. The protocol's relative youth compared to Bitcoin and Ethereum introduces uncertainty regarding long-term security assumptions and resistance to sophisticated attacks as stake concentrations evolve.

How does Tezos compare to other smart contract platforms like Ethereum?

Tezos and Ethereum differ fundamentally in governance models and upgrade mechanisms. Tezos implements on-chain governance where XTZ holders vote directly on protocol changes through a structured amendment process that upgrades the network without hard forks. Ethereum employs off-chain governance coordinated primarily through the Ethereum Foundation, core developers, and Ethereum Improvement Proposal processes that require community consensus outside the protocol. This distinction let Tezos execute over 17 protocol upgrades since 2018 without network splits, while Ethereum has undergone several contentious hard forks including the 2016 DAO hack response that created Ethereum Classic. Both platforms now use proof-of-stake consensus after Ethereum completed The Merge in September 2022, reducing its energy consumption from 46-94 terawatt-hours annually to approximately 0.0026 terawatt-hours—a 99.95% reduction. Ethereum maintains substantial advantages in ecosystem scale and developer adoption. Ethereum's market capitalization exceeded Tezos by a factor of approximately 770 as of November 2025, with Ethereum attracting over 16,000 new developers between January and September 2025 alone. The extensive developer community produces comprehensive tooling, documentation, and established patterns that lower barriers for new projects. Tezos prioritizes formal verification through Michelson, offering mathematically provable contract correctness that addresses security vulnerabilities, while Ethereum's Solidity focuses on accessibility and rapid development. Etherlink, an Ethereum-compatible Layer 2 solution built on Tezos technology, experienced significant growth in 2025 with total value locked increasing from $1.46 million to $82.73 million between January and November.

FAQ

References / Sources

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